Steve Hamilton is a Tampa native and a graduate of the University of South Florida and the University of Missouri. He now lives in northern Kentucky. A career CPA, Steve has extensive experience involving all aspects of tax practice, including sophisticated income tax planning and handling of tax controversy matters for closely-held businesses and high-income individuals.

Friday, July 11, 2014

No Job Is Worth This Penalty

A few years
ago someone asked me to “run their payroll.” This particular place had enough issues
to fuel multiple seasons of Game of Thrones, among the least of which
was an inability or unwillingness to pay their payroll on time.It was just a matter of time until someone
reported them to a government agency. I was to timely process the payroll,
transfer funds, make tax deposits and so on.

My answer?

Not a
chance.

I have no
problem processing a payroll. The one thing I will not do however is involve myself
with making payroll tax deposits.

Why?

There is an
IRS penalty out there called the “responsible person” penalty, which we have
previously referred to as the “big boy” penalty. This is gallows humor, and you
want nothing to do with this boy. The IRS becomes very grim when one withholds
payroll taxes and fails to remit them to the government. They consider it
theft. The IRS roots around to learn who in the company had control over cash –
that is, who decides who to pay, who can sign checks, that type of thing. If
that person is you, you may be a “responsible person,” meaning that you are
also liable for the payroll taxes. The IRS can chase the company, it can chase
you, it can chase both of you. You have stepped into someone else’s problem.

Where have I
seen this? Mostly it stems from severe cash flow pressures, such as after the 2008
business crash. My last responsible person penalty client was a contractor on
the Kentucky side of Cincinnati. What made it frightening was the IRS interviewing
the controller/office manager in addition to the owners. Why? Because, once in
a blue moon, she would write a check, mostly if there was no one else available
to sign. That woman was understandably terrified.

I am reading
a District Court decision coming out of Virginia. From 1990 to 2000 Brenda Horne
was the office manager for a medical practice. Her duties included:

·Billing customers

·Collecting accounts receivable

·Making bank deposits

·Writing checks

·Preparing, signing and filing payroll
tax returns

·Decisions about hiring, firing and
employee compensation

The company
stopped making payroll tax deposits in 2006. Brenda continued writing and signing checks to
everyone but the IRS.

The IRS came
in. The company owed over $2.8 million in back payroll taxes.

And now, so
does Ms. Horne.

Perhaps she
was part of this. Perhaps she was under-informed and went along in order to
keep her job. She wouldn’t be the first. The fatal fact? That she could decide
who to pay, who not to pay, and could sign checks accordingly. The IRS did not
get paid, and they held her responsible.

Granted, the
owners of the company are responsible long before an office manager is, but
that is not the way the IRS approaches this. The IRS is happy to have several responsible
persons. That increases the odds of collecting from someone. Theoretically, she
could sue the medical practice and its owners for restitution if the IRS compelled
her to pay. Considering that the company did not – or could not – pay the taxes
when due, I am skeptical that it could pay Brenda Horne now.

It does not
matter what she was paid for being an office manager. It cannot approach $2.8
million.

About Me

Thirty years years in tax practice. It's a long time, and I have seen virtually everything short of the fabled tax-exempt unicorn. I was raised in Tampa, went to school in Missouri, taught at Eastern Kentucky University, lived in Georgia, got pulled to Cincinnati when I married, have in-laws in England and a daughter going to the University of Tennessee. I am not sure where I will wind up next, but I hope there is better weather.